BUSINESS OPINION/John McManus: The Irish Financial Services Regulatory Authority has fired another salvo in its campaign to impose higher standards in the investment industry.
Within the next month consumer protection rules that apply to investment intermediaries are to be extended to insurance companies that deal directly with the public.
It is hard to argue against such a common sens+e move. Equally, the wide ranging review of all existing rules and regulations for all financial services services firms, that was announced last week by IFSRA has to be welcomed.
But, that said, there is growing concern among some section of the investment industry that there is something of a blind spot in IFSRA's vision. Some insiders have started to question whether IFSRA has given enough thought to inevitable consequences of tougher regulation, which is that we are likely to see more stockbrokers, investment advisers and other players going bust.
You only have to look at the pickle that Tom Grace of PricewaterhouseCoopers has got into a W&R Morrogh to see why people are getting worried. Mr Grace was appointed as receiver the Cork stockbroker in the middle of 2001. It is now well over two years since he started work and there is as yet no sign of a resolution. Meanwhile, he is reported to have racked up fees of €4 million, which depending on which report you believe could account for between 25 per cent and 80 per cent of the assets in the company. The reason for the variation is that the assets are primarily tradable investments and have been increasing in value since the markets started to recover earlier this year.
What seems to have caused Mr Grace the most difficulty is the lack of legal clarity as to which of these assets he is entitled to sell to cover the costs of the liquidation. The problem arises because most of the assets are in fact clients' investment held for them by the company through nominee accounts.
Mr Grace sought the courts guidance on the issue recently, but the judgment he got has in some ways made matters worse. The court ruled that costs of the receivership should come out of all the client assets on a pro-rata basis.
Although this clears the matter up from a legal sense, it has presented Mr Grace with a nightmare scenario. If he is to spread the costs on a pro-rata basis he will have to seek money from clients who did not use nominee accounts and have had their assets - share certificates etc - returned to them. We can only wish him well, but would not be optimistic of a successful outcome.
Stockbroking sources also point out that he should also offer clients who held assets in nominee accounts the right to pay him cash and get their assets back. There is also the issue of which of their assets held in the nominee accounts should be sold to pay for Mr Grace and who should decide. All in all Mr Grace is facing into an administrative nightmare, the costs of which will have to come out of the asset base he is trying to sort out. If things didn't go well - and there is no reason to think they will - then all the money could be burnt up in some sort of negative feedback loop. In this situation all the clients can expect is whatever award they get from the Investor Compensation Company Ltd.
Chances are that this will not happen, but Mr Grace now faces putting together some sort of deal that will probably see small clients being let off their share of fees and the bigger clients taking a hit. The incentive for them to do so is that the maximum compensation they can get from the ICCL is €20,000. Any deal that nets them more than this has to be an improvement.
Whatever way you look at it, Morrogh is undoubtedly a mess, and if another stockbroker went bust tomorrow it would probably be just as big a mess. What is needed, according to industry insiders, is some sort of statutory guidelines for examiners/receivers/liquidators of investment companies that go bust. This would prevent receiverships descending into the sort of quagmire that has engulfed Mr Grace at Morrogh. And they argue that IFSRA would be well advised turning its attention to such issues now, rather than piling the regulatory pressure on firms already labouring under a significant burden. IFSRA no doubt would counter that it has other priorities and its limited resources are better spent putting in place measures that will safeguard all investors, rather than ease the pain of the relatively small handfull who are affected by investment companies that go bust. There are also not many newspaper headlines to be generated in putting in place such belt and braces measures, and public relations are important for IFSRA which seems somewhat concerned about proving itself as a genuinely new agency and not some sort of "Central Bank Lite".
jmcmanus@irish-times.ie
